Learning Outcomes
By the end of this article, you will be able to identify and explain the key insurance provisions typically found in leases and underleases, including how risk is allocated between landlord and tenant, the operation of dual insurance, and the effect of rent suspension clauses. You will be able to apply these principles to SQE1-style scenarios and advise on common exam pitfalls.
SQE1 Syllabus
For SQE1, you are required to understand insurance provisions in leases and underleases from a practical standpoint. Focus your revision on:
- The allocation of risk for damage or destruction of premises between landlord and tenant
- The structure and effect of insurance covenants in leases and underleases
- The legal and practical implications of dual insurance
- Rent suspension (cesser) clauses and their operation following insured damage
- The effect of insurance provisions on liability and subrogation
- Advising clients on insurance obligations and remedies for non-compliance
Test Your Knowledge
Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision.
- In a commercial lease, who is usually responsible for insuring the building, and how are the costs typically recovered?
- What is the effect of a rent suspension (cesser) clause following insured damage to the premises?
- Explain what is meant by dual insurance in the context of leases and why it can cause problems.
- If a tenant causes damage by negligence, but the landlord's insurance covers the loss, can the insurer recover its outlay from the tenant?
Introduction
Insurance provisions are a fundamental part of most leases and underleases. They determine who bears the financial risk of damage or destruction to the premises, how insurance is arranged and paid for, and what happens to rent and obligations if the property is rendered unusable. For SQE1, you must be able to identify the key terms, understand how risk is allocated, and apply these principles to practical scenarios.
Insurance and Risk Allocation in Leases
A lease will always specify how the risk of damage or destruction to the property is allocated between landlord and tenant. The default position at common law is that the tenant bears the risk from the date of the lease, but this is almost always modified by express terms.
Key Term: risk allocation
The contractual arrangement in a lease that determines which party bears the financial consequences of damage or destruction to the premises.
In most commercial leases, the landlord arranges insurance for the building and recovers the cost from the tenant as an insurance rent. The tenant is usually responsible for insuring their own contents and business risks.
Key Term: insurance rent
The sum payable by the tenant to reimburse the landlord for the cost of insuring the building against specified risks.
Typical Insurance Provisions
A well-drafted lease will include:
- An obligation on the landlord to insure the building for the full reinstatement value against specified insured risks (such as fire, flood, storm, and sometimes terrorism)
- An obligation on the tenant to pay the insurance rent
- A covenant by the landlord to use insurance proceeds to reinstate the premises
- A rent suspension (cesser) clause if the premises are unfit for occupation due to insured damage
Key Term: insured risks
The specific risks (e.g., fire, flood, storm) against which the landlord is required to insure the premises under the lease.
Worked Example 1.1
A lease requires the landlord to insure the building against fire and the tenant to pay the insurance rent. The premises are destroyed by fire. Who is responsible for reinstating the building, and does the tenant have to continue paying rent?
Answer: The landlord must use the insurance proceeds to reinstate the building. If the lease contains a rent suspension clause, the tenant's obligation to pay rent will be suspended until the premises are reinstated and fit for occupation.
Rent Suspension (Cesser) Clauses
A rent suspension (cesser) clause is a standard feature in commercial leases. It provides that if the premises are rendered unfit for occupation or use due to damage by an insured risk, the tenant's obligation to pay rent (and sometimes other sums) is suspended until the premises are reinstated or for a specified period.
Key Term: rent suspension (cesser) clause
A lease provision that suspends the tenant's obligation to pay rent when the premises are unfit for occupation due to insured damage.
Worked Example 1.2
A flood damages a leased shop, making it unusable for six months. The lease contains a rent suspension clause. What is the effect?
Answer: The tenant does not have to pay rent during the period the shop is unfit for occupation due to the insured flood damage, up to any maximum period specified in the lease.
Dual Insurance and Subrogation
Dual insurance arises when both landlord and tenant have separate insurance policies covering the same risk for the same property. This can lead to disputes over which insurer pays and whether one insurer can recover from the other party.
Key Term: dual insurance
The situation where two or more insurance policies cover the same risk and property, potentially leading to issues of contribution and subrogation.Key Term: subrogation
The right of an insurer who has paid out on a claim to "step into the shoes" of the insured and pursue recovery from a third party responsible for the loss.
If the landlord's insurer pays for damage caused by the tenant's negligence, the insurer may seek to recover its outlay from the tenant by subrogation. However, if the lease requires the tenant to contribute to the insurance premium, the courts may find that the insurance is for the benefit of both parties, preventing subrogation against the tenant.
Worked Example 1.3
A tenant negligently causes a fire that damages the premises. The landlord's insurer pays for the repairs and seeks to recover the cost from the tenant. The lease requires the tenant to pay the insurance rent. Can the insurer recover from the tenant?
Answer: Following the principle in Mark Rowlands Ltd v Berni Inns Ltd [1986], if the tenant pays towards the insurance, the insurance is for the benefit of both landlord and tenant, and the insurer cannot recover from the tenant by subrogation.
Practical Issues with Dual Insurance
Dual insurance can cause problems such as:
- Disputes between insurers over who pays and in what proportion (contribution)
- The risk of insurers seeking to recover from the other party (subrogation), unless the lease includes a waiver of subrogation
- Increased costs due to overlapping cover
To avoid these issues, leases often require only one party (usually the landlord) to insure the building, and may include a waiver of subrogation clause.
Key Term: waiver of subrogation
A contractual agreement that prevents an insurer from pursuing recovery from another party to the contract (e.g., the tenant).Key Term: composite insured
A policy arrangement where both landlord and tenant are named as insured parties, so each can claim directly under the policy.
Insurance Provisions in Underleases
The insurance provisions in an underlease must be consistent with those in the headlease. The undertenant will usually be required to comply with the insurance covenants in the headlease and may be required to pay a proportion of the insurance rent.
Worked Example 1.4
A tenant grants an underlease of part of the premises. The headlease requires the tenant to insure the whole building. What should the underlease provide?
Answer: The underlease should require the undertenant to pay a fair proportion of the insurance rent and to comply with the insurance covenants in the headlease. The underlease should not require the undertenant to insure the building separately, to avoid dual insurance.
Exam Warning
In SQE1, you may be asked to identify the consequences of failing to include a rent suspension clause or to explain the effect of dual insurance. Always check who is required to insure, who pays the premium, and whether the lease includes a waiver of subrogation.
Revision Tip
When reviewing a lease for insurance provisions, always check:
- Who arranges the insurance and for what risks
- Who pays the premium (insurance rent)
- Whether the lease includes a rent suspension clause
- Whether there is a waiver of subrogation or composite insured clause
Key Point Checklist
This article has covered the following key knowledge points:
- Insurance provisions in leases allocate risk for damage or destruction between landlord and tenant.
- The landlord usually insures the building and recovers the cost from the tenant as insurance rent.
- Rent suspension (cesser) clauses protect the tenant from paying rent when the premises are unfit for occupation due to insured damage.
- Dual insurance can cause disputes over contribution and subrogation; leases should avoid unnecessary overlap.
- Waivers of subrogation and composite insured clauses prevent insurers from recovering from the tenant where appropriate.
- Underleases must align with headlease insurance covenants to avoid conflicting obligations.
Key Terms and Concepts
- risk allocation
- insurance rent
- insured risks
- rent suspension (cesser) clause
- dual insurance
- subrogation
- waiver of subrogation
- composite insured
